Governance For Rights Of Shareholders At The AGM

Rights of Shareholders at the AGM

Discuss about the Governance for Rights of Shareholders at the AGM.

Shareholders have the sole right to attend the AGM if their name appears in the register of the shareholders. When it comes to resolution, the shareholder have the right to articulate the views and vote on any resolution that he deems fit. However, it should not withstand any provision provided in the memorandum or articles. However, if calls are in arrear then  the member might be stopped as prescribed by the articles. The articles states that the preference shareholders are debarred from voting at the general meeting and rests upon certain scenario. A member can attend the meeting in general or by way of proxy. A proxy voting is given effect by an agent. The members at the AGM have the rights to select a proxy and vote in his capacity. The proxy has the same right like the shareholder. However, the proxy cannot vote by showing hands. The shareholders have a strong power as they can request to add a significant item to the agenda (Coffee, 2009). Such rights are highly appreciated as it help in showcasing the interest, the shareholder possess. A shareholder can question the board regarding the functioning of the company and any other matter that he deems fit. This involves raising questions regarding the profitability, declaration of dividend, etc.

Shareholders influence the functioning of the company by raising their queries and giving suggestion to the board regarding important matters. As shareholders have invested money, they are the owners of the company and hence have a right to speak as their money is involved in running the company. The decision of the company is influenced if the shareholders raise correct matter and speak in that regard. If the matter is of greater interest then the entire shareholder community adheres to it (Kruger, 2013). The directors and management are sure to shed light on such activities once a voice is raised. If there is an deficiency then the matter is taken under control and answer is provided to the shareholder regarding the line of activity. Moreover, shareholders can ask from the annual report and that needs to be answered at the point of venue (Alter, 2013). This implies that shareholders have a power to ask question regarding various activities and hence, management is always on the safe side ensuring that the activities are in proper control and that the annual report projects a correct figure. As shareholders questions and point the management regarding various activities, the management is always concerned about the activities (Hooks & Staden, 2011).  As transparency needs to be maintained so that shareholders are able to know the real happening. Therefore, the management injects greater efficiency so that the interest of the shareholder is not compromised. This leads to a better course of activity.

Comparison and Contrast of Shareholder Rights at AGMs

Companies Remuneration Reports bill was proposed by the United Kingdom Act of Parliament which required the companies to compulsorily report in the directors report the ratio of the highest paid director/ executive to the lowest paid 10% work force i.e. labourers of the company. The companies are required to place the report in the Annual general meeting of the company before the shareholders to approve the same. After the introduction of the same, these policies were also implemented in Australia and United States of America (Gillan, 2006). In today’s world of globalisation and to prove to the shareholders that the executive management is not taking the maximum salary of the company’s profits, the companies are compulsorily required to present a report wherein a ratio is made between highest paid director and 10% of the lowest paid employees of the company. But in United States a comparison is made between the highest paid employee to that of salary of average paid workers of the company and not with the lowest 10% paid staff of the company. But in Australia though the remuneration structure of the directors are disclosed but a comparison in the form of ratios are not disclosed in the reports which give a better transparency and a comparison of the remuneration paid to high paid employees (Kruger, 2013. Whereas United Kingdom government restricts the rights of the shareholders to binding vote for approving the remuneration reports in the annual general meeting on the other hand Australian government has given the rights to the shareholders to approve the remuneration structure of the executive body in the Annual general meeting based on which the future years remuneration structure will be decided after it is agreed upon (Crawford, 2008). Undoubtedly a transparency is required for the shareholders so that they can have a proper control over the decisions of the management and the executive management who are handling the finances and operations of the company cannot exercise a wrong power over the company and cannot take undue benefits of the powers given to them by the government. Though it is important for the shareholders to have a knowledge about the remuneration structure of the executive body but on the other hand wherein the management is taking all the risks to increase the profits of the organisation will not be able to take any incentive over and above as approved by the shareholders. The shareholders on the other hand will be of the view that the management is able to earn profits only by using the funds given by them to the company so the management should not be able to get the benefit over and above approved by the shareholders. This will though increase the transparency but management will not be happy with this and they will find out ways to get the benefit in the manner in which the shareholders will not be able to have an idea of the benefits being taken by them. This will lead to fraudulence in the accounts of the company and a clear and true and fair view of the accounts will not be presented in front of the shareholders of the organisation. 

Qualitative Hurdles in the Compensation of Executives

Rates of increasing use of qualitative hurdles in the compensation of executives have made the Australian Shareholders Association concerned. This is because such increment have enhanced to such an extent that multi-billion dollar rafts have become very common in large listed companies (Pvary, 2015). Furthermore, this has also generated a huge loophole in the pay structure of CEO’s and other executives of Australia on one hand, and other workforce and employees on the other hand. Besides, this gap has become so massive that it is highly subject to enhanced levels of criticisms. For instance, in the case of Commonwealth Bank of Australia (CBA), it has been noted that Ian Narev, the Chief Executive Officer of CBA received massive amount of executive compensation but the key thing that is worth mentioning is that more than half of the compensation resulted from endowing of previous LTI (Long term Incentive) awards (Pvary, 2015). This implies that such increased use of qualitative hurdles in executive compensation makes it simpler for an executive like Ian Narev and his upcoming successors to obtain huge payouts even in the future. Furthermore, recent and present international financial turbulence, and the escorting huge diminution of wealth of shareholders have strengthened the viewpoint that level of executive compensation are excessive. Such shareholders also view that compensation through qualitative hurdles does not align properly with their interests and motivate activities that contradict with long-term creation of wealth (ASA, 2016). The executives of Australia used to receive compensation against their customer satisfaction obstacles and TSR (total shareholder return) hurdles, but such recent changes in the use of qualitative hurdles have created an issue for the ASA. Another concern for the ASA regarding such matter is that most of the public listed companies of Australia utilize performance policies instead of dividends and price of shares, to ascertain the STI (short-term incentive) of their executives. These performance policies are highly and more often associated with the qualitative hurdles instead of performance of share prices. While these variations depict relevant sentiments in real, wherein hurdles rely on qualitative measures, there is high resilience in the interpretation that compensation payment will efficiently be up to the Board to determine (ASA, 2016).

Although such increased use of qualitative hurdles in payment of executive compensation have been framed to motivate the executives for the betterment of the organization as a whole, yet studies have depicted that qualitative hurdles can result in narrowing of focus, motivate immoral behavior, and diminish time horizons. Furthermore, it has been provided that reliance on qualitative hurdles regarding executive compensation can result in a harmful obsession with short-term measurement of performance. In addition to this, the incentive influences of executives’ compensation therefore are used to express the enhancement in the weighting of non-economical or non-financial output and input in adjusting awards. Therefore, both quantitative and qualitative hurdles must be used in the payment of executive compensation. Hence, such increased use of hurdles in executive compensation can highly alter their behavior and drive them towards immoral objectives, which is clearly not for the interest of the organization as a whole.

A company is an artificial person created by law which has a separate legal entity from its promoters, members and all such persons. A company can sue and be sued but it needs a human agency to act. So Directors are such elected representatives of the shareholders which are responsible for the day to day management and business affairs of the company.

As directors gain experience while performing their duties, they take up the directorship post on more than one company. This could both be a benefit as well as a problem.

As a lot of related party transactions are taking place, which might not be at arm’s length either of the companies could be at a loss and such transactions are apparently made possible by the directors sitting on the boards of more than one company (ASA, 2016).

It might be difficult for a director to concentrate and provide proper attention to the affairs of any specific company since the director has to take up the responsibility for the affairs of all the companies wherein directorship is held (Goodstein, 2011). This conflict of interest is a clear disadvantage of multiple directorships.  To safeguard companies against such cases, there are legal provisions restricting the participation of the directors in transactions wherein they have any kind of interest (Fich & Shivdasani, 2006).

The two or more companies in which the same individual is holding directorship might be competitors or creditors or a major supplier or in such a position where one company is in a dominant position over another (ASA, 2016). This leads to the exploitation of the information or resources and apart from the unwarranted advantage for the company, the director can also satisfy their personal interests in such cases. It need not be necessarily restricted to a particular transaction or arrangement but can extend to non financial interests as well.

Conflict of interest is not always direct (Levinee & Prietula, 2013). Indirect conflict of interest occurs in cases when a party related to the director or any relative of the director enters into a transaction with such company where the same director is holding multiple directorships. The possibility for any party to express an unbiased opinion or decision in this case is almost a rarity (Bowen, 2006).

Thus situations that could potentially make conflict of interest arise due to multiple directorships should also be expressly declared by the directors and they should restrain from participating in discussions or voting with reference to the same.

A director might be taking up the opportunity to accept directorship with another company for a situation where he could profit for himself and is not known or disclosed to the other directors or shareholders. All these situations could lead to the loss of time and money for both the directors and the companies (Kalpan & Williams, 2013). Practically there might be very few directors who might be able to do justice to multiple directorships but apart from that, this practice should not be encouraged for the better interests of the company and shareholders.

References 

Alter, S 2013, Work System Theory: Overview of Core Concepts, Extensions, and Challenges for the Future, Journal of the Association for Information Systems, vol. 14, no. 1, pp. 72-121.

ASA 2016, ASA questions increasing use of qualitative hurdles in executive remuneration structures, viewed 22 October, 2016 https://www.australianshareholders.com.au/node/1195087

ASA 2016, Is it time for Metcash chairman Rob Murray to resign?, viewed 22 October, 2016, https://www.australianshareholders.com.au/node/1154680

Bowen, W.G 2006,  The Board Book: An Insider's Guide for Directors and Trustees, W.W. Norton & Company: New York & London,

Coffee, J 2009, Gatekeepers: The Professions and Corporate Governance, Oxford University Press

Crawford, C. J 2008, Compliance & conviction: the evolution of enlightened corporate governance, Santa Clara, Calif

Fich, E. M., & Shivdasani, A 2006, ‘Are busy boards effective monitors?’, The Journal of Finance, vol. 61, pp. 689–724.

Gillan, S.L 2006, ‘Recent developments in corporate governance: an overview’, Journal of Corporate Finance, vol. 12, pp. 381–402.

Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley

Hooks, J & Staden, V.CJ 2011, ‘Evaluating environmental disclosures: the relationship between quality and extent measures’, British Accounting Review, vol. 43, no. 3, pp. 200-213.

Kaplan, S. & Williams, D 2013, ‘Do going concern audit reports protect auditors from litigation?’ A simultaneous equations approach, The Accounting Review, 88(1), 199-232.

Kruger, P 2015, Corporate goodness and shareholder wealth, Journal of Financial economics, pp. 304-329

Levine, S. S., & Prietula, M. J 2013, Open Collaboration for Innovation: Principles and Performance, Organization Science, Harvard Press

Pvary, A 2015, Remuneration voting, viewed 22 October, 2016 https://www.allenovery.com/publications/en-gb/corporate-governance/Documents/Brochure_Remuneration%20Voting-Dinesh%20Rajan.pdf